Monday, November 5, 2012

I'm a fiscal conservative and a supply sider, so naturally I think that a Romney win in tomorrow's elections would be better than an Obama win. Romney would most likely steer the economy in a direction that would reduce the size and influence of government (thus increasing individual liberty) and increase the after-tax rewards to work, investment and risk-taking (thus boosting growth). Obama, as he has demonstrated in the past four years, would work hard to do just the opposite. A Romney victory would improve the outlook for the economy, whereas an Obama victory would just mean more of the same disappointing growth that we've seen in recent years.

Yet when I look at the market, I see no sign that the market is enthusiastic about the election results. Perhaps this is because the intrade odds say that Obama has a 67% of winning. Perhaps it's because the polls are inconclusive, and some polls show that Obama has a good chance of winning. Perhaps it's because the market for a long time has been reluctant to believe that things will get better. For whatever reason, I don't see signs of optimism, so I must conclude that the market is braced for an Obama victory.

So if Romney wins tomorrow, that could end up being a very positive surprise for the market.

This chart of the implied volatility of equity options (the VIX index) tells us that the market is not nearly as nervous or fearful on the eve of a major presidential election as it has been at the depths of the Great Recession and the flareups of Eurozone sovereign debt default angst. At 18.3 today, the Vix is above the levels that are associated with periods of relative tranquility (10-15), but orders of magnitude lower than the levels that have been associated with crises (30-100. The market is concerned, but not terrified; worried, but not extremely so. Could this be complacency? I'm not sure. But it's not a sign of a market expecting a big positive surprise tomorrow. It's a market braced for more bad news, of the same variety we've had.

2-yr swap spreads are excellent indicators of systemic risk as well as excellent predictors of the financial and economic health of the economy. Today, swap spreads are about as low as they have ever been, and this is a good sign that the economic and financial fundamentals are healthy. Financial markets have no lack of liquidity; people can exchange risk with almost no friction. Nobody is locked into uncomfortable positions for lack of liquidity; those who were uncomfortable with the risk they were bearing have had ample opportunity to get out of their positions.

As the second chart shows, all of the above applies also to the Eurozone. There are still lingering problems, to be sure, but Eurozone swap spreads are low enough to be considered reasonably healthy. There's nothing fundamentally wrong with the economy, the problem is that the market doesn't see any reason to believe that things will get better.

Consistent with my view that this has been a reluctant recovery, the equity market continues to believe that earnings will decline, and perhaps significantly. There's more pessimism out there than optimism. That's why PE ratios are below average, even though corporate earnings are close to all-time highs both nominally and relative to GDP. The market is braced for bad news.

10-yr Treasury yields are almost as low as they have ever been. It's not because inflation is extremely low—it's because growth expectations are extremely weak. Inflation expectations are at the high end of their historical range, to judge from the spread between TIPS and Treasury yields. But with most TIPS real yields trading in negative territory, the only conclusion to be drawn here is that expectations for real growth are dismal.

Credit Default Swap spreads are roughly unchanged over the past few years, but they are still substantially higher than they were prior to the onset of the Great Recession. As with the VIX index, this is a sign of a market that is concerned, but not terrified. It's consistent with a market that is braced for more of the same disappointing news: weak growth, high deficits, Congressional gridlock, you name it.

When the market is braced for bad news, all an investor needs to win is for the news to be a little better than bad. If we indeed get a Romney win tomorrow, the news could eventually be much better than bad, and that's what leaves me optimistic.

(One major caveat: Romney's position on China is dreadfully wrong. I can only hope that he is shamelessly pandering in order to win over some independents, and that when he is actually in charge he will, as Obama has done, conclude that engaging in a trade war with China is in no one's interest.)

Who do I think will win? Romney, by a comfortable margin. I think the polls are systematically overestimating Democratic turnout, and underestimating Republican turnout. Thus they are underestimating Romney's strength by enough to put him comfortably over the top. I like Peggy Noonan's most recent take, "Monday Morning."

65 comments:

Don't bet the farm. Btw, the stats Guru from baseball come politics over at 538 blog has Obama at about 85% probability. Those are stats without the partisan rhetoric. Good luck on the blind shot in the dark. Not very econometric assessment you're making.

Nate Silver, the author of the 538 blog is as partisan as you get. He used to write for Daily Kos. We'll see if he's right tomorrow. If Obama wins, it will be the first time an incumbant wins reelection with fewer votes than his first election. I'm going to call it for Romney with 298 electoral votes.

Scott, I'd totally agree that the market is priced for an Obama reelection.

Thank you for the steer to the Peggy Noonan article. While I'm all for a Romney win (hopefully, an in-yo-face Reagan landslide), my gut is fearful of an Obama win.

But, I only know as much as any other person, and that's just a guess. My hope is in Romney's momentum in the post-debate/pre-Sandy polls; praying this is indicative of the country and follows what Noonan discusses.

The GOP are fiscal conservatives? You gotta be kidding me. Since when--Eisenhower? The GOP loves agency spending, and dare not cut entitlements--to many old people vote. Look at 2000-2008 and explain to me fiscal conservatism.

The good news is that we will be out of Afghanistan by 2014, and we are already out of Iraq. This will help shrink government. If we can face down the Defense-VA-Homeland Security boondoggle that now consumes $1 trillion a year. When we have no military foes of any note, and the "threat" is that posed by a few punk terrorists.

No, Obama won't do it, he has proved that.

Romney? Who knows--he has said everything in the last year on every topic or issue.

Monetary policy is key, and yet the candidates won't even discuss that.

"Yet when I look at the market, I see no sign that the market is enthusiastic about the election results."

Stocks are up almost 15% YTD. Where is the lack of enthusiasm?

"At 18.3 today, the Vix is above the levels that are associated with periods of relative tranquility (10-15), but orders of magnitude lower than the levels that have been associated with crises (30-100. The market is concerned, but not terrified; worried, but not extremely so."

FYI- The VIX has a 20 year average of 20.6. We are below average volatility. In fact, this may be the first year in 15 when the VIX didn't hit 30 at any point in the year: http://vixandmore.blogspot.com/2012/11/how-high-might-vix-spike.html

Today we will find out who wins the presidential campaign -- the military-industrial Republicans or the big government Democrats -- either way, Main Street USA loses -- the battle for political scale between Main Street and Federalism is still in play -- the coming fiscal cliff debate will optimize that fight in full drama...

PS: The California tax increases ballot measures should also be of keen interest to Americans -- so goes California will go the other states...

US residents can trade on Intrade, but to open an account you need to wire funds or send a cashier's check to Ireland. (Originally you could use a credit card to start an account.) A barrier to entry, but not sufficient to significantly distort the market.

"You see Scott we're not all sitting on the beach twiddling our thumbs. We're out here in the real world where there are storms raging. Pundits like u are part of the problem, not the solution. The people have spoken. Try eating some humble pie for a change"

If you don't like his blog just don't visit. Unfortunately, for you freebies you don't understand the ignorance of your entitlement.

Bill, it will be interesting to see if you dismiss Silver next time around.

"Nate Silver-Led Stat Men Crush Pundits in Presidential Election"

Nov. 7 (Bloomberg) -- Nate Silver was right. The GallupPoll was wrong. Silver, the computer expert who gave Obama a 90 percentchance of winning re-election, predicted on his blog,FiveThirtyEight (for the number of seats in the ElectoralCollege), that the president would receive 51 percent of thepopular vote as he called each of the 50 states, including allnine battlegrounds.

Thanks for maintaining this blog for the past four years. It remains one of the islands of sanity in an ocean of illogical thinking, schizophrenic values and unenlightened blather. Keep up the good work. Any thoughts on the Aussie Dollar?

The big government Democrats had a big night, especially in California -- Proposition 30 passed (which is a massive tax increase for the wealthy) -- also, early signs are that Democrats now have a supermajority in both houses of the California Assembly -- if the supermajority holds, then the Democrats together with Gov Brown will have the capacity to raise taxes in California with wanton ease -- massive tax increases in California appear imminent -- the wealthy in California lost big last night...

I hardly ever delete comments, but when they become rude and disrespectful to the point of offending me and other readers, then I will. I would like this to be a place where discourse is intelligent and reasoned.

Obama's election is floating on $4 trillion dollars of deficit spending. The underlying economics of Obama's presidency are still seriously flawed. Where is the growth going to come from? Obamcare's tax increass start in about 11 weeks. Capitals gains taxes increase over 50% on January 1, 2013. The tax rates on dividends increase almost 200%. Harry Reid and Obama want to let the Bush tax cuts on the top bracket expire and return to Clinton era levels. When Clinton raised top bracket rates growth slowed, and his capital gains rate was lower than the 1-1-2013 rate. Raising taxes isn't going to produce growth. Without growth Obama cant' reduce the deficit. The 2014 midterms will occur after two more years of 1-2% economic growth accompanied by +7% unemployment and at least $2 trillion more in accumulated debt if not $2.5 trillion more. The fact that 50% of the electorate either are fiscally illiterate, economically in denial, or simply voting liberal for President while electing conservative representatives doesn't change the underlying lack of effective policy for growth.

After Romney and McCain, there will be a call to get a "real" conservative, a true-red Republican who stands for something, and offer an alternative to the D-Party.

The far right-wing will complete its conquest of the GOP.

Romney was right (tactically) to swing back to the middle after his nomination. But it didn't help that GOP'ers were saying things like rape-induced pregnancy was God's will, so no abortions. Yikes!

Look for the fringe right to nominate a GOP candidate in 2016. If the Dems can find a middle-of-the-road white guy they could win LBJ fashion.

It is something that Obama could win, despite the small reservoir of racism left in the electorate. If only 2 percent of the population vote against Obama on his color, that could swing the election---but he won anyway.

I see two paths to the return of a Republican to the White House. One path takes us through four more years of a weak economy, persistently high unemployment, and a dangerous expansion of federal debt, all brought on by a continuation of Obama's misguided fiscal policies. The other (though not mutually exclusive) path involves the GOP unburdening itself of social issues. Social issues should not be part of the party's platform; they are best left to the states to decide. The GOP should focus instead on fiscal issues. When Bush can no longer be blamed for the weak economy, the public will clamor for an adult with experience to take charge.

Folks, the election is over -- we know who the President is for the next four years -- the we need to consider is how to make piles of money over the coming four years -- my money is in dividend and rent-earning equities -- I am now bearish on defense stocks -- I am bullish on construction, especially as QE3 picks picks up steam -- any other ideas (?) -- every period is just another money-making opportunity -- what propositions do we have for making money now that we know who the President will be...?

This post made two predictions: One, that the market was priced to the expectation of an Obama win. Two, that Romney would win. I was obviously wrong on Romney, but it remains to be seen whether I was wrong about the market. Today's selloff can hardly be proof of anything, and it could actually be the result of rising concerns about the looming fiscal cliff.

As I have been arguing for years, I think the recovery has been weak because of misguided fiscal and monetary policy. The market was and is still priced to a continuation of very weak growth, because there are unlikely to be any major changes to fiscal policy, although I dearly hope I'm wrong on that prediction as well.

Hi Scott, helpful -- I enjoy this blog more than you know -- I always leave with a sharp idea or two front of mind -- but, I am feeling uneasy about something, and I am not sure what that something is yet -- I continue to view our economy as being in a "buy" window -- I continue to predict that real working incomes will continue to regress to global standards (i.e., decline) over the next several decades -- I continue to believe that world-class skills that convert into premium wages is a wise path to building an effective estate -- and, I believe that long-term investors (30-years plus) are in a real buying window of opportunity right now -- what's bothering me is political instability in Europe and the US -- the clash between economics and politics in Europe is instructive -- recent decisions by the California electorate are also on my radar, and portend economic mayhem leading to political horrors along the US West coast -- OK, thanks again for maintaining excellent blog -- I am buying equities dividend and rent-earning with abandon right now -- but, I fear civil unrest in the coming decades...

PS: Perhaps fear of political unrest is holding down equities more than either fiscal or monetary policies, especially in Europe -- I view economic malaise as being different from political instability -- fear of political instability trumps monetary and fiscal policy at some point...

I am not sure how California can remain a US state in the future -- the rest of the US cannot backstop California spending -- I have been saying all along that as California goes, so does the union -- herein lies my deepest concerns for our nation's future -- the emerging conflict between East and West in the US is a terrifying eye-opener...

PPPS: If Pres Obama truly wants to lead our nation, he should propose a balanced budget amendment to the constitution that goes into effect on a phased basis over the next decade -- our political differences would dry up soon thereafter as Americans refocused on life, liberty, and the pursuit of happiness as their primary purposes in life -- I fear political insurrections in the coming years...

I was sure wrong also. Thought Romney would win. Never thought this country would reelect Obama. Didn't realize how deep class warfare is in this country. Didn't see the power and numbers of the dependent class. Had no idea that we have moved from a nation that rewards work, investment, risk taking, individual responsibility, freedom, integrity and honesty to a nation that simply wants their free healthcare, college, and cell phones.We collectively (well, some of us anyway) have 46% of our national income taken by governments every year. But that is not enough. Not enough in California. Not enough in Minnesota where we just put in place a Dem House and Senate with a Dem Governor who has pledged to raise the top rate to 12% PLUS an additional 3% surcharge on “millionaires” (those making over $250k). Obama has already raised my taxes (Obamacare) on investments and dividends. The majority of my income is dividends which will be taxed at 39.6%--up from 15%. Over 150% increase! Cap gains will see a 25% increase.Guess what. Speaking for the top 1%, we won’t put up with this. We will take our chips and go home. The cost of government in this country is too high. We will hide it, stash it, give it, and place it in such a ways as to avoid as much of the confiscatory rates as we can. We will not invest in startups and early stage companies. We will not start another business. We will not make equity investments to make returns on investment. We will pay lawyers and accounts thousands to create complex trusts, foreign investments, estate plans and the like to avoid paying millions to government. We will move out of Minnesota and California to Texas and Florida. And two years from now when the Dems control the White House, Senate and Congress on a wave of “tax the rich”, “fair share”, “evil corporate profits”, “the government will provide”, and raise our Federal taxes even more, then we will move to Costa Rica, Dubai, Australia, Switzerland, or wherever.We will sell our dollars for gold, AUDs, CHFs, and silver. Every dollar in my pocket is worth almost half what it was when Bush got into office. And nobody cares. No Dem cares. Many Rep don’t either. I have a stack of Zimbabwe $100 Trillion notes. Largest denominated note ever printed. If we could spend our way to prosperity Zimbabwe would be the wealthiest nation in the world. They aren’t. We are. And we are destroying it! We will look like Greece very soon. Actually, we already do!Yesterday came the death of the American way. Today starts the new America. A “fundamentally transformed” America. One not based on the constitution and the rule of law but one based on political allegiance and crony capitalism. One based on dividing one group against another. One that takes from the people in the name of the people. One where rights are not granted by the Creator universally but selectively granted by the state. One that demonizes a small percentage of its citizens to incite the rest. The really sad part is that we have seen this before. Across the globe and spanning centuries, It never ends well. In fact, it usually ends with thousands upon thousands imprisoned or dead. I guess it is time to cling to our guns and religion. May God help us. Please.

You are completely misguided. I am disappointed in what the election implications have for taxes, especially in California. I will definitely feel the pinch of Obama + prop 30 policies. However, the alternative option in the election was too much to bare in the uncertain and volatile world we live in today.

I believe the majority went with Obama because the GOP continues to nominate unstable and out-of-touch wealthy politicians. Scott is 100% correct when he says the GOP needs to detach social issues from the party platform. These social positions are downright frightening to the majority. Best left to the States. Additionally, the uncertainty and unstable nature of recent candidates makes the plod along at discouraging low growth rates path more palatable than the wide array of unknowns the GOP candidates have to offer. Just my opinion however.

On top of that, the electorate makeup is changing. So until the GOP recognizes the glory days of 80’s Reagan politics are gone. Good luck getting a GOP in the White House. The Dems are 4 for 6 with the @ led by the GOP ending in disaster and 2 decade long wars. Furthermore, if the GOP looks to an even more socially conservative candidate in 2016, Hillary Clinton will simply clean their clocks. Hopefully they nominate a moderate conservative but I think everyone is wondering if they’ve become extinct.

How in God's green earth am I out of touch? Jefferson was a "unstable and out-of-touch wealthy politician" according to you. The crazies you hate believe we should return to the principals of the constitutional republic that we formed. One that protects life, liberty and pursuit of happiness—not the pursuit of economic fairness and equality.

All this lamenting that the GOP needs to expand their tent is BS. We have nominated Dole, McCain, Romney, even Bush. NONE of whom were conservative/constitutionalists. The GOP is never going to win by out promising the Democrats—by being the 'entitlement-light' party. We’ve tried the moderate republican route. They give us higher spending, bigger government, more regulation, et al too. ENOUGH for goodness sake! What we have today looks NOTHING like America. NOTHING! We have a nation of babies that only want free stuff…including free contraception so they can fuck whoever they want whenever they want.

But in your great intelligence and insight, you may be right. Maybe an old, rich, white guy; one who believes in limited government, lower taxes, less regulation, and a strong a stable dollar; one who would bust unions; one who says that government IS the problem; one who calls communism/Marxism evil; one who believes in peace through strength; one who believes America was great, the last great hope of the world; one who believes in the sanctity of unborn human life; one who believes that freedom was only one generation from being lost; one who believes that marriage is between a man and a woman; one who had a deep faith in the Lord Jesus Christ and quotes Scripture often; one who believes that if we ever forget that we are one nation under God then we will be a nation gone under; just maybe a guy like that couldn't win 49 out of 50 states.

So pay your half to the king from what you produce and pray that’s all he wants. But don’t count on it.

I do not think they are crazy. Everyone has a right to an opinion in this country. I just do not expect the mentality you describe in full faith to capture more than half the democracy. Especially considering the demographic changes happening in this beautiful and strong country.

I am all for limited government, flat taxes for all income types and on both citizens and corporations. Zero intrusion of the government into my personal decision making and a return to Constitutionalism.

But this isn’t even close to the America your rhetoric describes. Since when did God promote peace through strength? And how does peace through strength get paid for? Taxes collected by the Kings through coercion and fear mongering. Nothing wrong with believing in the sanctity of an unborn child. However, government intrusion into the decision making process infringes on my Constitution. Additionally, Marxism and Communism are not evil. They are simply philosophies.

Your ranting is exactly why the GOP keeps losing. Be my guest and double down on it, but do not act surprised when the Democracy rejects it.

The only change I've seen is that the electorate is more left-leaning and ignorant of economic policy than I thought. That doesn't invalidate my policy prescriptions however, nor does it cause me to change my outlook for the economy.

the reelection of Barak Obama is a sad lowpoint for the US, but also another, louder call to arms for all the decent, conservative people. But it seems like they haven't fully realized that they are up against a very formidable and clever opponent with an agenda - and completely different values. At least I now can relate more to people who saw disaster coming for their countries and couldn't do much about it - except trying to escape to the US. But I am very impressed by the efforts of the conservative people in the US to at least keep the debate alive, something that has never happened in Germany (or any other country). America is not yet doomed, but it won't be a better place after the next four years.

Public Library, you claim to want the same things Jeff alludes to, but advocate for a Roe v Wade. For me that is Fed. gov't overeach. It should be a states rights issue. Besides you seem to ignore the fact that under O Federal tax dollars can go to funding abortion. That is not "American". That is socialism.

Marxism/Stalinism not evil because they are philosophies? C'mon, that's just a bit of of intellectual masterbation. The practice of communism has murdered more people than any other "philosophy" mankind has invented.

Peace through strength is the only way to maintain a stable global economy. But to believe this you have to believe we're the good guys, even when we screw up. As for costs, they continually shrink as a percentage of GDP.

Conservatives lost this election because the GOP is controlled by moderates. Conservatism is based on the individual. It is a philosophy of responsiblity. Conservatives believe that the role of government is more of one of stewardship, not of entitlement. Because of this it requires an enlightened constituency. One that is capable, more or less, of making their own way within a free republic. It is a harder row to hoe than liberalism, which is based more on communal cooperation and reliance on a governing body.

At the most basic, this country was founded on the principles of self reliance. The founders and, I mean not just the leaders but the people, wanted a place where they could build a life for themselves based on their own efforts and without a government that told them how to live and what to do. Is this today's America? Conservatives want that America back. Because of our success as a nation, the notion of self reliance has diminished. Entitlement has been its replacement. That is at the root of the divide in this country.

When conservatives stop nominating democrat lites as their candidate and instead offer to the electorate real conservative values and issues, we will have a chance to get back leadership. Unfortunately I fear we will have to endure a catastrophic ordeal first, for their is no doubt that the policies of Obama and the progressive socialist liberals will wreck havoc on the economy as well as the social and cultural aspects of America.

I don't expect you to agree with this but I feel better having said it.

If Communism is Evil, then guns are Evil. But I am sure your base case argument for gun rights is "guns do not kill people, people do."

So just as Jeff elaborated, you are speaking out of both sides of your mouth.

Regarding abortion; if we are talking truly conservatism, why would we even let the States dictate what we can or can't do? Leave it to the people. I am all for it but the Conservatism you describe requires people to buy into your personal philosophies not grounded in economics.

As IU said before, good luck on the double down effort. If conservatives would simply focus on economics as Scott describes, they might have a decent chance.